Credit Sources on Lookout for Liquidity Issues at Sears

Many credit professionals are expecting an announcement of an asset sale of some kind to alleviate liquidity concerns.

With many retailers cutting forecasts for the second half, credit professionals now expect Sears Holdings Corp. to reveal a sale of some kind to alleviate liquidity concerns when the retailer posts second-quarter results on Thursday.

The company possibly could sell the service-protection business connected with home appliances, or there could be more real estate asset sales, credit sources said.

That’s in part because chief financial officer Rob Schriesheim said at the end of the fourth quarter that “we expect to generate at least $500 million of additional liquidity through monetization of assets over the next 12 months.” He emphasized that Sears Holdings is an “asset-rich enterprise with substantial liquidity, unencumbered real estate and well-established stand-alone businesses, including Lands’ End and Sears Canada.”

According to one credit analyst, “There’s a very good chance of [an asset sale] happening. Many retailers are reporting lackluster earnings because consumer spending has slowed in the quarter. If really strong retailers such as Macy’s have not comped well, it’s hard to believe that Sears has outperformed anyone.”

He added that Sears Holdings had a big cash burn rate in the first quarter, due to Sears’ business, even though it likely picked up some apparel sales from J.C. Penney.

Another credit analyst said Kmart has been hurt by lower discretionary income among its customer base when the payroll tax increase went into effect in the first quarter.

One asset many believe should be sold is Lands’ End, which former chief executive officer Alan Lacy acquired in 2002 for $1.86 billion, before the merger of Sears and Kmart and when Sears was then Sears, Roebuck & Co.

Financial sources said Sears had pitched Lands’ End to private equity firms in 2012. These individuals also said that a few strategic buyers kicked the tires, and there were even offers for the business in the $1 billion range, far lower than the asking price of $2 billion.

Sears Holdings doesn’t break out the financial performance for Lands’ End, but market sources said that the operation is a $3 billion business.

An executive who makes recommendations on credit risk for his apparel firm said, “I think Sears has to make changes to Lands’ End. It’s a good model, but it needs to be spun off if they don’t find a buyer. Lands’ End is like a Lexus in a Toyota showroom: The business has value.” This executive added that the operation has been hurt over the years as Lampert, in cutting back on capital spending, hasn’t reinvested into the business.

In September 2012, Sears restructured the operation such as its warehousing and call center, citing the growth in online shopping as the reason. Those moves resulted in the layoff of nearly 200 staffers.

Like Lands’ End, the profitable service-protection business has been shopped to potential buyers.